IEEJ：August 2020

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Special Bulletin
A Japanese Perspective on the International Energy Landscape (495)

August 27, 2020

Present Status and Outlook of Global LNG Market under COVID-19 DisasterKen Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanThe COVID-19 pandemic has exerted great impacts on the global economy, international
politics and geopolitics, throwing international energy markets into a tumultuous whirlpool. It hasbrought about a substantial plunge in energy demand, an energy oversupply and energy pricedeclines, gravely affecting the global energy industry. As a result, great uncertainties have arisen
about energy investment required for the future, threatening to deal a severe blow toenergy-exporting economies that depend heavily on energy export revenue and to trigger their social,economic and political destabilization. While the pandemic’s impacts range very wide and arecomplicated, this report focuses on impacts on the liquefied natural gas (LNG) market.
Before the COVID-19 disaster, global LNG demand was growing robustly. Average annual
growth for three years from 2017 stood at as high as around 10%, concentrating in Asian emerging
and developing countries such as China, India and Southeast Asian countries. LNG, known as clean
fossil fuel, was spreading as a mainstay energy source or an alternative in many Asian countries tocoal to cope with air pollution as their urgent issue. Encouraged by growing Asian LNG demand, theglobal LNG industry planned to launch new LNG supply projects, creating a trend in which bothLNG supply and demand were expanding together.
The COVID-19 pandemic has dampened the LNG growth trend and hopes on future
growth. Although global LNG demand continued growing despite the previous global financial crisisof 2008-2009, demand is expected to decline in 2020 as the pandemic has put an unprecedented
damper on the global economy including major Asian countries. Global economic contraction andstagnant global trade have seriously affected LNG demand. The Institute of Energy Economics,
Japan, forecasts that global LNG demand would decline from 347 million tons in 2019 to 325
million tons in 2020 in a reference scenario assuming a steady economic recovery from the second
half of this year or to 317 million tons in a scenario for the pandemic’s prolonged economic impact.
Before the COVID-19 disaster was taken into account for the outlook, the IEEJ had forecast global
LNG demand in 2020 at 369 million tons.
Even before the pandemic, the global LNG market had been expected to see an oversupply.
Global demand in the year had been predicted at 369 million tons as mentioned earlier against 381
million tons in supply capacity. Given the launch of LNG projects under hopes on demand growth asmentioned above, the supply capacity of 381 million tons had been expected to be realized in 2020.
As the pandemic has dampened LNG demand, the oversupply is set to increase. Based on theabovementioned numbers, a potential global oversupply in 2020 comes close to 60 million tons. In
response to the massive potential oversupply, spot LNG prices reflecting the supply-demand balance
have plunged. Asian spot LNG prices have fallen to historical lows around $2 per million British
thermal units.
The LNG market has shown dynamic reactions to the historically low prices. In the LNG
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market that does not have any mechanism like the OPEC-plus group’s strategic reduction of supply
in the international oil market, low prices themselves can become a key factor to trigger supply anddemand changes. The extremely low prices have exerted pressure on LNG suppliers with highmarginal production costs to exit from the market. Such pressure is stronger for suppliers withshort-term flexibility. In a typical development where low prices caused LNG supply cuts,
substantial numbers of U.S. LNG export cargoes have been cancelled. Conventional LNG project
operators might have attempted to utilize their built-in flexibility as much as possible and cut supply
to meet the demand fall. On the demand side, however, the remarkably low prices have enhanced
LNG’s price competitiveness against rival fuels. The low prices (and expectations of prices
remaining low over a certain period of time) are expected to stimulate LNG demand in emerging anddeveloping countries.
Meanwhile, the LNG market sometimes sees “supply-driven” developments where newLNG project operators explore sales channels or market shares. Although actual supply would be cut
from the above projected supply capacity at 381 million tons in response to the weak prices in 2020,
some excessive supply would flow into the market in search of buyers. The IEEJ’s LNG demand
projection represents “quantity demanded” based on economic growth, industrial production andother assumptions. In the actual market, “quantity supplied” may emerge as actual sales. Interestingin this respect may be the natural gas and LNG supply-demand trends in Europe.
In the first five months of 2020, gas consumption in OECD Europe totaled 237 billion
cubic meters (BCM), down 19 BCM or 7% year on year. The decline was mainly attributable toeconomic contraction, lockdowns under the pandemic and other factors. Gas imports from outside
Europe decreased by 15 BCM or 9%. However, LNG imports in the period increased by 8 BCM or11%. Due to the LNG import rise and the consumption fall, pipeline gas imports posted a substantial
decline of 23 BCM or 26%. In particular, pipeline imports of Russian gas plunged by 19 BCM or23%, accounting for most of the total pipeline gas import drop. LNG oversupply flew into Europe as
the “last resort market” to adjust supply to demand in the world market, exerting downward pressure
on pipeline gas imports from Russia. In this sense, future gas supply and demand in Europe andRussian pipeline gas exports would attract attention as factors having influence on the global LNG
supply-demand balance.
Irrespective of “supply-driven” developments, we must recognize current oversupply in
the LNG market and its potential prolongation beyond expectations under the pandemic. Even earlier,the global LNG market had been expected to see an oversupply in the first half of the 2020s.
Whether the market would transition from oversupply to equilibrium and to overdemand had been
predicted to depend primarily on the pace of demand growth mainly in Asia. Given the pandemic’s
impact, however, we must also pay attention to future gas supply and demand trends in Europe,
Russian gas strategies and future LNG supply capacity to be affected by the delay, revision orcancellation of LNG project investment decisions under the current low prices. Furthermore, wemust watch how the position of natural gas and LNG would change as decarbonization initiatives areenhanced globally over a long term.
The sustainment of adequate investment in the entire LNG supply chain and thedevelopment of relevant infrastructure will be required for LNG to achieve sound growth as key
energy source in Asia and the world. To this end, market stability and rational pricing will remain
important for all LNG stakeholders.

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